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The Times, They Are a' Changing
by Professor von Braun
September 23rd, 2000
Once again it appears that a rocky October is ahead and that it is already off to a good start. If it's not rising oil prices, or falling Asian stock markets, or currencies that sink to new lows, then it's declining corporate profits and rising bond prices. How could all this be happening at the same time?
Investing today is becoming very, very complex. Every time I hear one of the talking heads mention the idea of "long term", this strange sensation goes up and down my spine. Other terms like "great American stocks" or the "great American economy" or the "great US dollar - the world's favorite currency" I get that same sinking feeling. "Who do you thing you are fooling?" one has to ask.
To play the markets these days requires knowledge of things that the average investor does not even know exist. Basic economics went out the window several years ago, about the same time that basic derivatives came in the back door. The average investor, whoever they may be, is about to get taken to the cleaners in every way possible and yet they remain completely unaware of the predicament they are in and in fact have helped to bring about.
With considerable assistance one might add--bubblevision and its prime time players, the talking heads and their talking head guests, themselves totally unaware of the chaos about to unfold in markets everywhere. There is a reason the likes of George Soros and the Tiger fund are either out of business, or have scaled back their activities dramatically after suffering substantial losses. That reason is called risk. The risk is too great. Which means the underlying fundamentals are not underlying fundamentals at all. They are inherent risks that are best avoided. Which is exactly what these experienced investors, considerably more experienced than the average investor we hear about, are doing. They are on the sidelines for a reason. The risk is too great.
Several currencies have been experiencing all time lows against the US $ of recent times. The Euro, (how lo can a euro go?), the Aus $, the New Zealand $, some Asian currencies are repeating 1997, the British pound, the list goes on. What's causing the US $ to strengthen? How about rising oil costs? Oil has to be paid for in US $'s and as oil rises in price so does the demand for the greenback. What's causing currencies to weaken? More of them have to be sold to pay for the oil that keeps going up in price and as nobody wants what's being sold it's hardly surprising that currencies are falling.
It was not all that long ago that the NZ $ was in the mid 70's and now it's at 41 cents, a handsome 45% haircut. The Aus $ has fared a tad better than that, but not by much. If you were invested in the NZ or Australian stock market then you now have a currency problem as well.
Investing in stocks at present is definitely risky. The Asian markets are off their much-touted recovery highs, the European markets are off their highs and the US markets appear to know only one direction and it's not up.
The only up index at present appears to be the commodity index. Gold of course keeps taking it on the chin, surprise, surprise, and silver seems undecided as long as it stays under $5.00.
We have been told by the "BLS" mouthpieces that inflation is low and all is well in "lala" land. John Law, the father of modern banking, is it seems alive and well living in Washington DC and now has a job with the Federal Reserve as special advisor to anybody that will listen. We hope the governor of Mississippi is paying attention.
The derivatives markets are complex by nature, being not other than a series of complex complexities designed to reward the participants with large profits for doing basically nothing. But even complexities have their limitations and there are only so many transactions available before the losses begin to mount. I did this week hear of some Australian miners that had sold forward earlier this year and then locked in an Aus $ price of 68 cents by way of a hedge against a rising Aus $. Now it's at 54 cents. Oh well, just another small loss. I wonder who sold them the contract?
Considerable publicity has been given to recent remarks by Mr. Godsell (is he a preacher?) of Anglogold, which appear to be negative towards the yellow metal. I wonder if anybody has thought of the potential that he might be trying to talk his book down on purpose. Anglogold has been touted as an acquirer of several other mining companies but has yet to make any serious moves. Given the conditions in the gold market at present why not keep your powder dry. Certainly some have moved too soon, Placer Dome being an example. Would it not be better to talk everybody's book down at the same time? What better way to get pole position?
The mining industry is getting smaller and smaller and by the time this 20 year bear market is over there will only be a handful of mining companies around. I am sure that Anglogold already has its intended targets under close watch and will eventually make several moves. I was asked in an email as to what would I advise Barrick to do about its hedge book. My answer was "hand over the keys".
The simple answer to the average investor's worst nightmare is cash up and buy some physical gold. The real McCoy, not some fancy paper contract, and take delivery. After the proverbial has hit the fan, then get back in to paper markets, selectively one hastens to add. Things are going to get rough out there.
The Prof can be contacted by email at email@example.com
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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